Under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”), a debtor may receive a discharge from claims under its plan of reorganization. A chapter 11 discharge functions as a release of liability for the debtor. Often debtors attempt to include releases for non-debtor parties as part of their reorganization plans to preclude creditors from asserting claims against non-debtors. However, the Bankruptcy Code does not expressly provide for such “third party releases,” except in the context of asbestos cases. Nevertheless, bankruptcy courts have approved third-party releases in other circumstances. The courts, however, are divided as to the appropriateness of third-party releases. Indeed, the circuit courts are split, with some reluctantly permitting non-debtor releases while others reject them completely.
This memorandum examines whether bankruptcy courts have jurisdiction to issue third-party releases. Part I is three parts. First, it focuses on the Bankruptcy Code’s text and its failure to provide for third-party releases. Second, it discusses the circuit court split. Third, it lays out the different circuit court tests. Part II is twofold. First, it examines the Second Circuit’s test regarding third-party releases. Second, it examines the opinions of Southern District of New York bankruptcy judges.